Hi Heather,

When my wife and I graduate with our masters in the next few months, we’ll have about $100k in loans ($30k for me, $70k for her). We each have multiple Stafford loans (a few are unsubsidized, the rest subsidized). My plan is to consolidate them so we just have two loans to make payments on (hers and mine). I used the consolidation calculator on https://loanconsolidation.ed.gov, and it looks like we get the same interest rate regardless of the type of loan we choose (e.g. Standard, Graduated, Income-Based, etc).

Here’s my plan, please shoot some holes in it. I will sign up for the loan with the lowest monthly payment, but then pay more than my monthly minimum payment each month. That way we pay them off as soon as possible but if something happens where our income is cut, we can still at least make our minimum monthly payment (as opposed to signing up for the aggressive program and then being wed to a high monthly payment).

So my main question is, is there any problem with paying more than my minimum payment each month, and paying my loans off early? Is there an early repayment penalty? I can’t find any mention of it the government’s website.

Thanks for your advice!

El Capitan!

When you say Standard, Graduated,and Income-Based, think of those as repayment options that are available for federal loans, including consolidation loans, they are not loan types.  That’s just semantics but it helps explain that you are correct, the repayment plan you select does not determine your interest rate. The consolidation loan(s) interest rate is based on the weighted average of the underlying loans, rounded to the next 1/8 of 1% (negligible).

Some people have variable interest rate loans, but if you borrowed after 2006, you should have fixed rate loans.  If you have variable rate loans, it matters when you consolidate, because that’s when a rate is locked in.  Rates are low now and likely to go up, so it’s a good time to consolidate variable rate loans in my opinion.

Yes, for federal loans, you can prepay with no penalty on any repayment plan.  If you pay more than what is due, the extra money will be applied first to late charges or collection costs if any, then to interest, and finally to principal.  The lender will automatically advance your next payment due date unless you tell them not to, so if you want to prepay some of the principal, you need to ask for that in writing.  The National Consumer Law Center (who we LOVE!), advises that you send the payment and request together, via certified mail, get a receipt, and keep copies for yourself.

Another thing to think about: I like IBR more than an extended term of repayment, because it has a 25 year maximum repayment term and the potential for loan forgiveness.  If something unexpected happens financially, I think it provides some protection you don’t get in the “standard” and extended terms.

You are welcome!  Take your big ‘ol educations and save the world!

Thanks for the info. When you talk about loan forgiveness, are you talking solely about the public service forgiveness, or are there other opportunities? I ask b/c I’ve worked in government in my particular field before and found it wholly unsatisfying- too much beuracratic nonsense and surrounded by slackers- and there is no public service option for my wife’s profession.

Thanks!

Here when I mentioned loan forgiveness, I was talking about the 25-year Income-Based Repayment forgiveness, which is not tied to employment at all, public service or otherwise.  IBR will forgive remaining debt, if any, after 25-years of qualifying payments.

There are lots of loan forgiveness programs, but with the exception of the 25-year IBR forgiveness, they are nearly always tied to specific employment, usually service related.